A reserve release, often called a rebate, is the second payment a seller receives on a factored invoice. After the customer pays the factor, the factor deducts its fee and any shortfalls from the held-back reserve and pays out what is left.
How it works in factoring
The basic arithmetic is:
Rebate = amount collected minus advance minus fees minus other deductions
Timing depends on the agreement. Some factors release each invoice's reserve as soon as payment clears. Others reconcile weekly or monthly and release a batch. In pooled-reserve arrangements, the factor may keep a minimum balance and only release amounts above it.
Illustrative example: An invoice of $12,000 is funded at an assumed 80% advance ($9,600). The customer pays the full $12,000. With an assumed $360 fee, the factor releases $2,040 to the seller.
If the customer pays late, a time-based fee grows and the rebate shrinks. If the customer short-pays, the shortfall usually comes out of the rebate. If the customer never pays under a recourse agreement, the factor may charge the shortfall against other reserves or require the seller to repurchase the invoice.
What to check
- How often rebates are paid and whether you must request them
- Whether a delinquent invoice on one customer can hold up rebates on others
- What reporting you receive to reconcile each release against your ledger
Slow or unclear rebates are a frequent source of friction. A written schedule in the factoring agreement avoids surprises.